AIG Takes Off on Heavy Volume

Updated to include latest share price, NYSE statement.

NEW YORK (TheStreet) -- American International Group (AIG) shares soared higher Tuesday, a day after the insurer announced plans to pay down a significant amount of its federal debt.

AIG shares were recently up $4.19, or 14.4% at $33.29. Earlier in the session, they went as high as $34.80. Volume of more than 52 million exceeded more than four times the issue's trailing three-month daily average of 11.3 million.

Late in the session, the New York Stock Exchange (AIG) released a statement saying it had contacted AIG about the "unusual market activity" and the company reiterated its policy of not commenting on such matters.

Before Monday's opening bell, AIG announced plans to sell its Alico division to MetLife (MET) for $15.5 billion. It was its second major deal announced in as many weeks, sealing plans to repay about $51 billion in debt to the Federal Reserve.

Bullishness about the company's progress in restructuring and debt repayment was possibly amplified by traders covering short bets as well. About 16.4% of AIG's outstanding stock is sold short, according to ShortSqueeze.com -- meaning that holders are borrowing the stock for a fee, betting they can sell it high, and pocket the difference when they have to repurchase it at a lower price. When stocks start to gain ground, as AIG did on Monday, short sellers may rush to cover their bearish bets, thereby fueling a rally.

On Monday, AIG's stock rose $1.02, or 3.6%, to $29.10.

In contrast to AIG's short interest, other financial firms have much less of their float sold short. Bank of America (BAC) had under 4% in the most recent count, Wells Fargo (WFC) and Citigroup (C) had just over 1%, and JPMorgan Chase (JPM) had 0.7% sold short. Even the zombie mortgage finance agencies Fannie Mae (FNM) and Freddie Mac (FRE) had under 12% of their float sold short.

While the AIG rally this week has been impressive, the insurer's fundamentals don't appear to warrant the surge. For instance, its $4.6 billion market cap on Tuesday afternoon is dwarfed by the other $47 billion in debt, and other interest and dividends it still owes the government. The company hasn't been profitable on an annual basis since 2007.

-- Written by Lauren Tara LaCapra in New York.

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